A higher benchmark rate makes it tougher to qualify for a variable, HELOC or 1- to 4-year fixed term. (Mind you, one 20 bps hike is not as impactful as dramatized headlines like this suggest.)
A 20 bps jump in the qualifying rate means a household at the edge of affordability would need ~$1,100 more income to get a variable-rate mortgage on a $300,000 house with 5% down.*
Looking back to May 1, 2013 is more telling. Since then, a 5-year fixed mortgage payment on that same $300,000 house has risen about $120 a month to ~$1,475. That kind of payment change is a potential source of financial “difficulty” for less than 1 in 10 mortgage holders—if past CAAMP surveys are a guide. Note that “difficulty” does not imply default.
Naturally, all these incremental rate hikes can add up and decelerate home sales. But based on past consumer surveys, it could take a good point and a half rate-bump to curtail buying decisions in meaningful ways. At the moment, we’re only halfway there.
* Note: The benchmark rate has little effect on someone choosing a fixed term of five years or more. That person’s ability to qualify is instead dependent on the actual rate they pay (a.k.a. the “contract rate”).
Rob McLister, CMT
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